DEV Community: Jeremy Smith

Mortgage Debt Repayment

Jeremy Smith — Mon, 23 Oct 2023 11:56:30 +0000

I have always had an interest in personal finance and used to work directly with some of the best financial advisors in the uk. What i suggest here should not be considered financial advice and may mean taking on a higher level of risk than most people are comfortable with. So it is not for many, but it is one way I believe would help repayment of mortgage debt (without consideration of risk tolerance).

What

Reduce income tax liability, and maximise potential investment growth by making payment to a SIPP instead of paying off your mortgage debt. Then use your tax free cash allowance from that SIPP to pay off your mortgage when you retire / drawdown.

Why

Income tax reduction

You can reduce your taxable income by paying into a salary sacrifice SIPP, this will reduce your income tax and national insurance liability. This means a basic rate taxpayer will get approximately 32% (20% basic rate tax and 12% national insurance) immediate benefit of paying into a SIPP over taking a higher salary and paying down your mortgage.

Earn more from investment growth

Investments in the stock market go up and down, but as long it goes up more than inflation (and the costs of the investment, such as fund fee and management charge of the platform you hold the investment on) an investment provides a positive return. If that return is greater than the interest rate you pay for your mortgage your are making a better return on investing the capital than repaying the debt.

Impact of inflation on debt

Every year your debt reduces in (real term) value by the level of inflation, i.e. your debt is worth less next year than it is worth this year - this is called the opportunity cost of capital. This means you (real term) earn inflation rate times debt you hold - so holding debt is good (but you have to pay for it and it's risky).

Investment returns compound

If your investment increases this year, next year the amount invested is (hopefully) higher. However, for fair comparison, paying debt down also compounds.

Tax Free Cash

As I write this in 2025, you can take 25% of your SIPP's value at retirement as tax free cash, i.e. not pay income tax on it when you withdraw it from you SIPP.

How

What I propose is that you build wealth in your SIPP during the your life and repay your mortgage when you retire.

Say inflation is 2%, which is what the bank of England try to maintain the UK inflation rate at. Each year you can expect the prices of goods go up on average 2%, your mortgage will be able to buy you 2% less in the real world (which is why things cost more and more in the shops each year), and thus if you have a £100,000 mortgage after a year of 2% inflation it is now only (real term value) £98,000. Debt can therefore be used to your advantage, being in debt is not always a bad thing.

Compare inflation to the interest rate you pay to the bank, if the UK inflation rate is 6% and you are paying 4% to the bank you are (real term) earning 2% on the debt each year, and this compounds.

Typically you would expect inflation to be at 2%, you would pay a 6% mortgage and therefore the real term cost of the mortgage is 4% (not 6% like you may think/feel).

You will have to pay the bank to borrow that £100,000 and if you only pay the interest you will still owe £100,000, but next year your £100,000 debt is now worth 2% less, and the year after that your £98,000 (discounted value next year) is worth another 2% less i.e. £96,040, on paper it is still £100,000, but the real term value of that debt is less.

Owning mortgage debt is good as it is cheaper than credit cards / loans, but it carries risk; what if the bank increases the interest rate (borrowing cost) when your deal expires, or house prices fall or you can't afford the keep the debt? Or the price of your house falls below the amount you borrowed for it (negative equity)? Then you will need to unload the debt in some way - selling the house? Taking in a tenant? Getting another job? You need to ensure that you never over leverage yourself - which is the act of taking on more debt than you can manage, and hence the reason why people reduce debt.

You are multiplying risk / reward by taking on debt.

Productive self development

Jeremy Smith — Sun, 04 Sep 2022 13:01:37 +0000

Personally i like labelling things, here are three labels that I find useful to create a clean mental model.

Career
Relationships
Self

You can replicate something similar to the following for all three, but it is probably mostly related to career development.

In this article I am going to write a few notes about setting goals and how to make progress in your career.

Objectives

I believe in creating systems and habits over a series of goals being achieved, but your system needs to have a direction the goal is the compass

Deciding your career goals / objectives

Be honest where do you want to go in your career, are you committed enough to make it to CTO or run your own startup one day?

You may be happy with a senior role in a company without this stress and only working 9-5, decide what you want your life to look like.

Defining goals

So we need goals - how do we define them? OKR's are well known concept, they consist of mainly;

Objectives: Whatever you want to achieve
Key Results: How you measure your progress towards your objective
Tasks: What you need to do - the individual tasks, projects, and processes that drive progress towards a key result

So create a few OKR's for your life - where do you want to be in 3 months time - what does success look like? How would you achieve this? What habits are required to achieve these goals?

I like short term objectives, such as three months. I find a week is too short a time-frame and a year is too long, but this process belong to you.

Align what you want from your career with what the company is offering

If you want to progress in management and thus want to develop management skills / to start mentoring others and there are some opportunities to mentor people take those opportunities, or more accurately go out and look for those opportunities, talk to more junior staff and see if they would like to formally set some sessions up with you.

If the company is offering work with React and you want to be a better React / technical engineer then there is a fit, continue to work on those projects, or go and look for how you can integrate the latest technology with the current tech stack in the company, you need to take the initiative, not be told to.

Taking the iniative also means you guide your career in the direction that you would like to take it.

Agreeing what you want to achieve with your manager

So you have some OKRs for your life, you know how to measure success, you know the tasks that you need to complete to achieve success and you have done this all by yourself - and you have taken steps to help out in the company with what they need already so you have already delivered value for your manager... what next?

Tell your manager - explain where you want your career to go, what do they need to do to assist you solving the problems that this company has? Do they have any problems or tasks that you have on your list and want to solve that you have not thought of?

It is a good thing to leave a company that is not supporting your growth in the direction that you would like. The company would benefit from finding someone who fits their company better and you would grow faster at a company that supports you in your own journey.

121's

So you have decided goals and you are making progress, you would benefit from external input on your performance, so in your 121, ask:

What specifically have i been doing well since our last 121?

This question forces your manager to think of you in a positive light, it also highlights the things that you have been doing well and should continue doing

What specifically could i have done better?

This is the hardest and most valuable question, your manager will probably not like giving this feedback to you as the conversation will be hard. It can cause conflict if not received with gratitude and thanks for honest feedback on how you can improve, and it requires your manager to be actively engaged in your daily work, thus building a relationship with them.